Pipe: the most interesting fintech in new asset class investing

Pipe’s page

The overall environment:

A quick recap, there are 3 factors at play that’s giving rise to alternative investing:

  1. More people are investing due to excess cash.
GDP measured by quarter for the last 4 quarters

Why Pipe

Pipe is a platform for investors to get yield backed by a company’s recurring revenue, and for companies to access to funding without diluting equity. Currently, it’s limited to recurring revenue for SaaS companies. Pipe is basically a form of RBF/MCA (revenue backed financing / merchant cash advance), but does not require any warrants or lien and offers the cheapest such solution for companies. For investors, the value proposition is opportunity to invest in low risk (similar to first lien debt), but higher than expected return product.

1. New asset with better return / risk profile

Pipe has created a new asset class that has better return over risk profile than incumbent investment products. This is an amazing innovation.

Similar risk to first lien debt, but much better return!!

2. Business-funding fit

Patrick McCormick wrote an excellent analysis on Pipe. He is spot on when he coined term “business-funding fit” for Pipe. It’s definitely worth the read, but I will boil it down:

  • Basically the idea is that there are different best ways for companies to fund themselves during different phase of the company.
  • For example, during the initial ideation “installment phase”, where product is being developed and tested, due to the unpredictable and speculative nature, VC capital using equity may be the only option.
  • As the company gained traction and enters the growth phase, it becomes possible to predict growth (user, revenue, other measures), companies should start to add debt to its capital structure as a source of funding.
  • A better way to finance than debt is through recurring revenue, and Pipe is the platform to do so.
  • Pipe, due to its platform model, actually turns out to be the cheapest way for growth stage companies to get funding (more on that in the next section)

3. The platform model: Connect the buyers and sellers

Now, financing by recurring revenue is nothing new. Clearbanc has started way earlier than Pipe. The difference is that Clearbanc uses more of a venture capital / hedge fund model, where investors are buying into their fund, and Clearbanc uses the fund to invest in recurring revenues of SaaS or eCommerce companies. Though Clearbanc is a great company, I like the platform model offered by Pipe better due to the following:

  1. Platform model tends to offer the best deals for companies
  2. Flywheel effect
  3. The platform delivery model is better than the VC / HF model
  1. VC equity
  2. Debt / VC debt
  3. Revenue backed financing (RBF) / Merchant cash advance (MCA)

Looking forward

Currently, Pipe is just focused on SaaS revenues for pre-IPO companies. This makes a lot of sense given the stability of SaaS revenue and likely simplifies the underwriting process and risks, lowest hanging fruit first principle. Pipe can certainly expand horizontally and vertically. It certainly exhibit the N of 1 effect

Conclusion:

Alternative investing is here to stay, and Pipe is currently my favorite company in the space. Pipe created a new asset class that has better risk adjusted return than similar incumbent product (first lien), gave companies cheaper way to fund itself (business-funding fit), and delivered through platform model. The best part is that it’s just getting started!

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Ming-Chieh Lee

Ming-Chieh Lee

passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain